Final Wednesday noticed the UK Authorities’s Spring Assertion on the economic system: basically a response to a brand new forecast from the Workplace of Budgetary Duty. This was politically painful – a deteriorating forecast signifies that the federal government must both scale back public spending or improve taxes to ensure that the forecasts to fulfill its self-imposed constraints on public borrowing and the deficit. These forecasts are all the time unsure, and extremely depending on what assumptions are made concerning the future. This set of forecasts underline how necessary productiveness development – or the dearth of it – is for the flexibility of the federal government to fulfill its commitments.
First, the place are we now? Right here is the most recent productiveness information. To recap, as I’ve been discussing for a while now, for a lot of the postwar interval, productiveness within the UK grew at a gentle fee of two.1% a yr. That modified within the mid-2000s, within the run-up to the worldwide monetary disaster; the expansion fee quite abruptly dropped to about 0.5% a yr. The cumulative impact is that the productiveness of the UK economic system is now some 28% under what it could have been if earlier pattern had continued.
UK Labour Productiveness index, quarterly information. The stable blue line is a greatest match to a perform which assumes two intervals of exponential development steady at a break level. See my publish When did the UK’s productiveness slowdown start? for particulars of the becoming methodology. The perfect match parameters are: pre-break development fee: 2.1%, post-break development fee: 0.48%, break at yr 2005.2. Information: ONS, Feb 18th 2025 launch.
Taking a extra close-up take a look at the final twenty years, one sees that there isn’t a signal of any restoration of productiveness development. Quite the opposite, the previous few quarters appear discouraging. I feel it’s in all probability too early to conclude that we’re shifting right into a interval of even decrease productiveness development – one wants to attend some time to see the long-term tendencies, and information is commonly revised. As well as in the intervening time there may be a fear about high quality of the survey information ONS makes use of to estimate whole hours labored, which provides additional uncertainty.
UK Labour Productiveness index, quarterly information. Information: ONS, Feb 18th 2025 launch, match as within the plot above.
What’s the OBR predicting for the long run? It’s central forecast relies on the idea that productiveness development will increase by 2029 to a price which is kind of the typical of the pre-break and post-break values – 1.25%, with a rise of 0.2% to the expansion fee attributed to planning reforms resulting in extra house-building. It has additionally modelled the impact of an upside situation, the place productiveness development of 1.2% is achieved in 2025, and a draw back situation persevering with current decrease pattern development of 0.3% a yr.
UK Labour Productiveness index, annual information, along with the OBR’s March 2025 eventualities for productiveness development as much as 2029. Gray is the primary March forecast, yellow & inexperienced are excessive and low productiveness development eventualities.
The subsequent plot, from the OBR report, reveals how a lot distinction assumptions about productiveness development make to the fiscal projections. With out the idea that productiveness development is about to extend considerably over the pattern it’s adopted for the final 15 years, the federal government’s fiscal targets for the debt and the deficit can’t be met. On this situation, the federal government would wish both to chop public spending additional or improve taxes to fulfill these targets.
Impact of the totally different productiveness development eventualities on the OBRs fiscal forecasts. From the March 2025 Financial and Fiscal Outlook.
So, massive choices concerning the UK’s fiscal coverage are being made on the premise of predictions of future productiveness development, and the query of whether or not the federal government will meet its fiscal targets are very delicate to the assumptions being made. How a lot credence can we place on these forecasts? It does need to be burdened that the OBRs file on predicting productiveness development has been constantly overoptimistic since its institution, because the plot under reveals. I feel this displays a wider failure by the UK’s financial and policy-making neighborhood to understand the size of the change to the UK economic system within the Nineties and 2000s and its long run results. There is no such thing as a extra necessary financial coverage query than to grasp the causes of the productiveness slowdown – and to seek out insurance policies to reverse this.
Successive OBR forecasts of productiveness and outturn. Supply: OBR